IRS Issues Updated Guidance on Retirement Plan Periodic Payments

On January 18, 2022, the IRS released Notice 2022-6, which provides updated guidance regarding when payments from qualified retirement plans (including 401(k) plans) are considered substantially equal periodic payments that are not subject to the 10% premature withdrawal tax on early distributions. Notice 2022-6 modifies and supersedes Revenue Ruling 2002-62.

Substantially equal period payments are plan distributions based on the life expectancy of the account owner (or account owner and beneficiary) that must be taken at least annually. Three methods are available to calculate the payment amounts:

  1. The required minimum distribution (RMD) method
  2. The fixed amortization method
  3. The fixed annuitization method

Generally, the payments must continue unchanged until the later of five years or until the account owner reaches age 59½.

Notice 2022-6 does not substantially change these distribution methods but provides certain related clarifications and modifications. For example, the guidance explains that for an account owner using the RMD or fixed amortization method, the new life expectancy tables (issued in 2020) should be used for any series of payments beginning on or after January 1, 2023, and may be used for payments beginning in 2022. Additionally, an account owner that begins payments before 2023 using the RMD method may switch to an updated life expectancy table without such change being treated as a modification of payments.

The notice also updates the interest rate that may be used to apply the fixed amortization method or the fixed annuitization method. As modified, the maximum rate is the greater of 5% or 120% of the federal midterm rate.

Furthermore, the notice provides guidance on the determination of the account balance used to apply the fixed amortization and fixed annuitization method. Specifically, the account balance on any date within the period that begins on December 31 of the year prior to the date of the first distribution and ends on the date of the first distribution will be treated as determined in a reasonable manner.

Sponsors of qualified retirement plans that permit periodic payments after employment termination should be aware of this update and consult with their service providers regarding implementation.

N-2022-06 ( »